tv [untitled] June 19, 2012 1:00pm-1:30pm EDT
the after scene afterwards and in each case they'll tell us what they do next time. this doesn't hold true, we're trying to do better than that. i know you gave the testimony here and back of the senate. your exact quote i had was with regards to the role of the regulators and what they could and couldn't do. i think you have to give regulators realistic objectives. i don't think realistically they can stop something like this from happening. and if we were misinformed, we're not purposely misinforming them, too. there was 100 regulators embedded working full time getting up every day to work at your firm. so aren't we in the case where there's a little bit of a charade here with the american public with regard to what it is that the regulators even after 2300 pages of dodd frank are able to do in these circumstances that they're really not able to get into the
detail into the granular nature of things with or without modifications to the rules? >> i think i mentioned before. you really take assumptions and help. i don't think that stopping one thing. but they could deseminate good information. they could make the system better in total. they're fewer mistakes and far between. i would never blame them for a mistake we made. maybe what they learned from us will stop someone from making a similar mistake. >> ranking member were somewhat taken aback by some of your responses to dodd frank and the legislation and how it's being implemented. that's fine. i concur and injure part is to lobby for, if you will, the position for your firm on positions of these issues and something more from that as far as what's best in the interest of your investors, too, i would presume, correct? >> nope. my highest most important thing
to me is the united states of america. >> actually -- >> i look back at anything i say was in the interest of the united states of america and not in the interest of j.p. morgan chase. i feel that j.p. morgan chase all the regulations will continue to serve our clients and that's what we're going to try to do. >> i was going to lead there with your answer to the first question. part of the reform of the reform that we may need in this area is what? the extraterritorial effect of some of the rules that we've had so far. we've done that in a bipartisan manner. you see at the same time what the previous panel coming out with chair proposed regulations, not regulations, but rules and guidance in certain areas. in the areas of coming up with various standards. coming up with two separate standards for swap and security base swap dealers.
a, is that the appropriate manner that we should have purely guidance rules coming out where you don't do a cost benefit analysis before hand or should there be more of a close working relationship between the cfdc and the sec when issuing rules in this area? >> the cftc is a primary example where we should have one set of rules around derivatives and swaps. we have competing sets of rules. thinking through what makes sense and cost benefit always is the right way to do it. it's hard for me to imagine it's hard to do something better than that. >> i would agree that we haven't seen that though since dodd frank has been passed into law. >> there may have been places it was done, but i'm unaware of it. >> just to close then, i thought your answer was going to be slightly difference with regard to the volcker rule when you said things may not have been different had the volcker rule been fully implemented here. i thought the answer would be, had the volcker rule been law at
the time, their simply would not have been trades going on because of the uncertainty not only by the regulator but the uncertainty by institutions and what trade is permissible and what trade is not permissible. >> we're really focused on portfolio hedging which sing the minor part of volcker. i think it's the market making that allows capital markets to remain healthy. to finance companies at a very cheap cost to invest toers and issuers. that to me is a more important part. if i remember correctly there are 170 things written about that and there's concern that will stifle the the capital markets here if they're not done right. they may end up being done right. the regulators want to get them to the right place. it's very hard to do. >> thank you. i yield back. >> thank you. >> thank you, mr. chairman. first of all, i want to tell you that i've agreed with a lot of the statements that you've made. that may surprise some people.
it shouldn't. i think first of all i welcome your voice in the discussion about what is appropriate regulation. there's no golden answer that any of us, at least i don't come to the table thinking i know the answer. you think you try. so i welcome your voice whether we agree or not in the final analysis. i parly welcome your comments on title two of dodd frank. you have clearly stated that you are not too big to fail. is that a misinterpretation? >> nope. >> i agree with you. i wish that some of my colleagues on the other side would finally hear that. i think we handled that in dodd frank. you stated it. i agree with you. i think we have too many regulators as well. i wish that some of the large institutions even in general the larger institutions and the organizations were nowhere to be found when we're having this debate during dodd frank. i was on the side of simplifying the number of regulators not because of what they're going to regulate. it is too many people doing the
same thing. i totally agree i want to try to reduce the number of voices at the table to make your job easier. that doesn't say i would reduce the regulation. i do want to talk about the extraterritorial yality. i don't think you've said anything here with competitiveness. but i want to be clear. i want to make clear that i'm understanding you correctly. you're not arguing that all financial institutions u.s. or any others should always seek the least regulated regimes. . >> that's not my argument. >> i don't think so, but i wanted to be clear about that. i would suggest you're not wrong about competitiveness. it's nobody's goal to try to regulate you into a competitive disadvantage. and i think that's what the world is trying to accomplish now. basel three is a classic example. sit not the answer. but it is a step many the direction of trying to get all the major countries around to have similar approaches towards
financial institutions. there are still loopholes whether you take advantage of them or not, there are leap hols, they exist in london and elsewhere. which is why people are there. you may not be there for that reason. i don't know and i really don't really mind whether you are because you're one institution. the institution of j.p. morgan in and of itself is of little interest to me. what i'm interested in is the entire system and the u.s. competitive advantages that we might have. when you have a loophole in london or any place else that people take advantage of regulatory schemes we need to talk about it openly to try to find out whether their regulation is better than ours, or worse than ours and regardless how we can work them together so the loophole's not just for you so your competitors don't get an advantage. i would argue when you say you're looking out for the best deal, you're 100% right. you should. but the truth is if it's only about the bottom line best deal you'll be loaning your money on the corner of some street because they get a better deal than you do.
they loan out their moneys at much better rates than you get. the difference is it's a little less secure. so when you talk about best deal it's not just bottom line. it's also the ability to get those loans paid back and to make a profit, is that an -- you're not just looking. >> i refer to best deal for the client. we're not going to win the business if we give them not the best deal. >> exactly right. the best deal is more than the lowest common denominator. it's security, stability, it's operations under the rule of law to know what the rules are to know the deal you're making is a deal you can enforce. is that a fair way to say it? >> true. >> we're not that far off. i do want to talk about one thing happening today. there's another committee meeting, at least the news reports are reporting they're going to cut out $25 million from the cft's ability to pay their staff. do you think that's a smart thing for us to be doing to be cutting the ability of regulators to do their job?
>> i have never looked at the cftc budget. we've already said by the way that we have an cftc and sec in duplication. i prefer to fix the duplication. that's what i do at my company. i can create more staff, too, but it's not the right thing to do. >> do you think it's a smart idea with the regulatory that we have today, we agree that's not what we have, but it's what we have. do you think it's a smart idea to cut the legs out of one of the regulators? >> i have enough problems. i'm going to leave that to you. >> the only reason i ask you had no hesitancy expressing opinions on other matters. >> i know nothing about their budget. i don't know how many pleas they have. i really don't know. so i try not to have comment when i know nothing. >> i'd like you to learn and maybe get back to us on the answer. the truth is i'd like to hear your answer before we actually vote on the floor. thank you, mr. dimon. >> you do know that we're in
serious trouble down here in our budget. you'd rather have your budget than ours, i'm sure. >> no comment. >> miss hayward. >> thank you, mr. chairman. mr. dimon, i realize that the activity that we've talked about in terms of the loss for morgan in april was bank hedging that was within the institution. i have introduced legislation that passed unanimously to repeal most of the swaps. it strikes me that this example of the potential risk undertaken. there's always risk and loss from time to time. the potential risk undertaken in these sorts of activities does -- it would seem perhaps highlight the need for us to keep those activities within
institutions where they are more regulated, if you will. i'd just appreciate your comments on that. >> i would agree with that. the push out i never understood it. i thought it would make things risier and not safer. i never understood why it was put in there at all. >> i have broad support for that. i'm hopeful that we'll be able to move that through expeditiously. with regard to the fact that derivatives activities seems to be concentrated in london, i get get the sense it's because they're the specialists. they do that kind of thing all the time. by chairman gensler implies the rules are inadequate and threw the g will have 20 our regulators have coordinated fairly closely. do you feel that there is a need for us, the sec is about to come out with its ruling on
extratorial active. do you feel that we need to have some sort of regulation that we apply to our subsidiaries? >> no. i've been clear. i think the foreign laws should apply over there so we can compete fairly over there. they were always regulated. the occ and the feds, there's potential regulation at the top. and the trades we are clot ralized, 60 cleared. i think some of those rules wouldn't have mattered at all. aig keeps coming up as an example, aig was insured only, they weren't trying to hedge anything. aig was an insurance company. aig didn't understand credit derivatives. they were not mark to market and for the most part not collateral. completely different example and a different industry. >> and an enormous level of
risk. but you cannot map that situation on to the morgan situation. and now clearly, sir, there have been questions about the activities of risk committees obviously there are lessons that you've referred to that j.p. morgan has learned. are there lessons that we can apply to what our regulators use, the criteria they use and look at how the institutions undertake risk? >> risk committees, obviously we failed in this regard, we have very strong risk committees. you need prorply staffed. prorply reported. independent minded. the job is to challenge management. all the way to the ceo. why are we doing that? why don't we have more limits. let's stress test it. that's what those committees are supposed to do. proper reports. and protecting the management from themselves sometimes. and our risk committees do
report independently. in this particular case the risk committee made the same lack of oversight that i probably made a little bit down the line about this one activity. it should have been much tougher. >> in terms of obviously j.p. morgan has regulators in house who closely monitor your activities. is there an element of human nature that makes us certain to a certain extent comfortable with each other and how we do things that may lend a certain amount of hazard to these relationships over time? >> they can be pretty tough. it's human nature. i say it's okay. the next person doesn't spend that much time on it. and everybody say it's okay. >> because you have a track record. >> you can't be complacent about risk. it has to go through rigor.
it's not if you trust the person, it's got to be independently verified. >> thank you, chairman, i yield back. >> mr. hinojosa, five minutes. >> mr. dimon, thank you for your testimony. the recent j.p. morgan loss comes at a time when we have many in your industry complaining about the new regulations put in place with the dodd frank wall street reform act. for good situation the loss has pressed the pause button on the constant stream of attempted roll backs to dodd frank. it seems to me that with the recent conviction of a prominent wall street corporate director, wall street firms do not seem to be going out of their way to restore trust with the american
people. i understand that j.p. morgan will still turn a profit this year. but the size of the loss and the complexity of the trades in macro hedging that caused the loss still gives cause for concern. there needs to be an evaluation of not only prudent regulations, but also the broken culture on wall street. a culture that some believe provides perverse insent i haves to play fast and loose with other people's money. after the crisis there should have been major self-reflection and reelves of wall street. mr. dimon, looking back at this loss, do you feel that the compensation structure at j.p. morgan might have created incentives for excessive risk. >> i don't agree with what you said about wall street. i'll be direct about it. there are a lot of people you can trust on wall street. there are a lot of people you can trust anywhere. when anyone blankets a whole
industry with the same fan, i think we're making a big mistake. i just think it's not fair. we try to have a culture of the company where people have long-term careers. they aren't paid just because of profits. they're paid because they're good managers. they're paid because they recruit. they're open minded. they're independent on risk committees. they participate in the company. they mentor younger people that's what we do. it's not just financial results that drive people's compensation to j.p. morgan. no one in this area had formulas. is it possible that someone here says i was driven a lot by must be. people it shouldn't be a great surprise to anybody else, some people have driven a lot by money. some are not. >> next question, do you feel there's a problem with wall street culture? >> i think there might be a problem with some people on wall street. and wall street for the most part, you know, are honest, decent, horde working people.
their slients trust them tom the extent we lose it, we should earn it back. i think if you talked to most of our clients they think that j.p. morgan tries to do a very good job for them. when we make a mistake we admit it. we try to rectify it. and all the firms are different. so i can't speak for every firm while i'm standing here. >> mr. dimon, what would you perply recommend be done by congress to strengthen the dodd frank act so that we can prevent actions for the complexity of trades and risky derivatives and macro hedging that cost the loss of at least $2 billion at j.p. morgan which brought us to this congressional hearing? we want to ensure similar losses do not occur in other banks. i'd like to hear your recommendations. >> i have lost this argument publicly many times, i'll make
it again. regulation is not binary. it's not left or right. it's not democrat or republican. these are complex things that should be done the right way in my opinion closed rooms. i don't think there's a lot of progress in an open hearing like this. talking about what works, what doesn't work and collaborating with the business who has to conduct it. we want a safer system, too. we'll do anything we can to be part of the process to make it healthy and safe. i should point out it is a lot healthier and safer today. the market did a lot of thins like i mentioned, no sub spriem mortgages, no exact derivatives are going away. regulation has created more capital, more liquidity, standardized derivatives. it is a much stronger system. a lot has been accomplished. >> my time has ended and i yield back. >> thank you, mr. mchenry for five minutes. >> thank you, mr. chairman.
mr. dimon, there's this discussion today the distinction between hedging and proprietary trading. can you define the difference of hedging versus proprietary trading? >> i'll tell you what i think. a hedge is meant to protect few yo something goes wrong in a decision you make. proprietary trading i think it's making a bet that prices change and you can make money in a price change. the problem is that is every time we make a loan, it's proprietary. the riskiest things we do is loans. they're all proprietary. irunderstand and never disputed the intent of the volcker rule trying to make companies safer. i totally agree. i think we made something very complex which is going to be
very hard to legislate or put in leg latory terms that works. >> is there a bright line distinction between hedging and proprietary trading? don't they look similar unless there is a balanced trade on the other side that matches up? >> i think in some case there's a bright line, yes. >> okay. how is -- how long have you been in finance, how many years? >> a long time. 30 years or so. >> we'll just say a long time. >> for a living you're supposed to know the distinction between this. is there a bright line distinction between that and if you can't determine what that is, how can a regulator determine that? >> if upped to make the system safer, i would have said for trading, proper capital, proper liquidity, make sure it's large -- you look at inventory, you have proper risk reporting. you do have the ability to
portfolio and hedge. you need that in trading. and you can track all these things to say if you're running a good customer business. it does not eliminate risk, it will mitigate the risk. >> did you support dodd frank? >> that's a hard one to say. >> did you support dodd frank? >> we had a major crisis in. the crisis unveiled lots of flaws in our system. not one flaw. we understood the need for reform. there are parts of dodd frank we supported. there are parts of dodd frank we didn't. there are lots of parts of dodd frank. it's not like we had the same vote. >> suffice it to say you've got a little buyer's remorse. you know, i understand you're basically saying, yes, you understand the need for changes, you just don't like the result. >> some of the result. >> some. it can be modified.
>> with volcker as it's being written, the distinction between, you know, proprietary trading and hedging that is a bit of the debate that's going on right now. so, look, my concern is in the post tarp era, when we said we're going to end bailouts we codified and institutionalized it. therefore when a company like yours that received extraordinary support from the government has a trading loss, the government gets very involved. why is the government very involved? because we've institutionalized too big to fail and bailouts with dodd frank. now to that point, during your hearing last week with the senate, you discussed the distinction between a resolution authority and bankruptcy. would you touch on that? would you explain your view on what is preferable, the resolution authority as written in dodd frank or bankruptcy. >> a lot of semantics.
i would use the word bankruptcy, but that implies the eequity gets wiped out. a court manages the wind down of the company. you do need an expert like the fdic to manage the process that's got the right people, the right structures, the right capabilities to manage the wind down. that should be wound down and board of directors fired, the company should eventually be dismand nld a way that does not damage the economy. the name should be buried in disgrace. that's what should happen. >> that's called bankruptcy, right? >> you guys can call it whatever you want. i'm not going to get involved in the debate between bankruptcy and resolution. >> you're involved in the debate, actually, sir. i don't know if you've been here. anyway, the distinction between resolution authority which is in essence codified too big too fail and codified the fact the
government will lift you up if you fail, the trading can be as risky as possible. this is the crux of the debate. >> they'll keep it going, but the equity is wiped out, unsecured is wiped out. company is not there without damaging the economy. >> i'll put you on the record as support i ever of that. >> thank you. mr. milner for five minutes. >> thank you, mr. chairman. mr. dimon, you were very dismissive last week with the senate about a bloomberg article i think you told the senate committee not to believe everything they read that said the cio had really changed from being a fairly sleepy cautious risk mitigation unit and had become much more aggressive, much more risk tolerant and profitable. it was your intention that it become a profit center and in fact, more than a quarter of the profits from 2010 came from cio's trading. but there was a question that
senator johnson asked you from that -- from that article about -- that there has been a limit that traders had to liquiduate. had to get out of any position they lost $20 million and you were very puzzled by that and said you knew nothing about it. have you inquired since then if there was such a limit and if it was changed. >> no. >> you have not asked within your organization? >> i think we referred to something back in 2007 or 2008, so i did not ask, no. >> you did say last week that the failure with these trades was not that it was rogue traders. they weren't violating the risk controls. the risk controls were not sufficient. that is correct, right? >> they were too low -- they were too high. they should have been much more lore limits. >> did they have any limits. last week you seemed to indicate
not? >> the cio is total limits. the unit didn't have their own. but they used the cio's limits. >> but a limb of $20 million in losses and then you close the position that would be a fairly granular risk control, wouldn't it? >> if that were true. it depends with the areas, but yes. >> you have been very critical in this matter and you said that it was a significant risk management failure. said it was flawed, complexed, poorly reviewed, executed, poorly managed. but on february 29 you filed a certification required by law that you had adequate risk controls in place. that management's assessment, the firms determined that there were no material weaknesses in controls of financial reporting as of december 31, 2011. i know that you're entitled to
rely upon your subordinates and i'm sure you relied upon your subordinates in making that certification, but was it correct? >> it was. >> it was correct? >> it was to my knowledge at the time. >> not based on your knowledge at the time, but based upon what you know now was that certification correct? >> that's why we're having the review to make sure we have all the right things in place. that's what companies do when they have problems. they analyze them, review them and make determinations like that and their view's not done yet. >> all right. who is entitled to, it seems like that certification is intended for regulators. it's also intended for investors, isn't it? aren't they entitled to rely upon adequate risk controls? >> i don't know the thing you have in front of you. >> what's that? >> i don't know what you're referring to. we try to give proper disclosures to our investors. >> we're talking about the certifications to risk controls. that's the certification
required by law and presumably it's for both regulators and also for investors, isn't it? >> we try to disclose what we're supposed to disclose. >> all right. what inquiry did you make about risk controls at cio before you signed that certification? >> i believed that the risk controls were properly being done. that they were properly being done. >> you were surprised last week at the question about the $20 million limit. it appeared to be something you were hearing for the first time and you haven't inquired since then whether that was true. it seems like there must be a limitation on that entitlement if you have noticed that there's something wrong. one of the ways you might get other information would be from the financial press. did